Paulson & Co., which held 34.7 million shares of Sino-Forest as of April 29, said in a filing yesterday that it had
disposed of the stake as of June 17. The New York-based firm’s
holding was worth C$815.80 million when it was disclosed. Its
value had dropped to C$110.69 million by the end of last week.
The actual loss may vary depending on when Paulson bought and
sold the shares.

The investment is a public misstep for Paulson, 55, who’s
betting on an economic recovery after making $15 billion for his
backers in 2007 wagering against subprime mortgages. His largest
fund lost about 13 percent in the first half of June, bringing
declines this year to about 20 percent, as bets on Sino-Forest
and U.S. bank stocks soured, two investors said last week.

“Paulson is under the limelight on this investment,” said
Steven Persky of Dalton Investments LLC, a Los Angeles-based
fund with $1.3 billion in assets. Still, “any money manager is
going to have some losing trades, it’s part of life.”

Sino-Forest has slumped 89 percent in Toronto trading since
June 1, the day before Muddy Waters LLC, an investment firm run
by Carson Block that’s betting against the stock, said the
forestry company overstated its timber holdings. Sino-Forest has
said Block’s statements are false.

Ratings Cut

The “complexities” of Sino-Forest’s corporate structure
prompted Fitch Ratings to downgrade its long-term foreign-currency issuer default rating and senior unsecured debt rating
to BB- from BB+, Fitch said yesterday in a statement. Ratings
may be cut further if the “issues” aren’t resolved, it said.

Paulson, the biggest shareholder in Hong Kong-based Sino-Forest until the selloff, probably reduced losses by paring the
stake before the Muddy Waters report. The hedge fund told
clients in a June 3 letter that its total investment in Sino-Forest represented about 2 percent of the Advantage and
Advantage Plus funds as of June 2. The funds have $18 billion in
assets, a person with knowledge of the firm said at the time.
The letter suggests the firm had cut its stake by about 30
percent by June 2, when Sino-Forest shares lost 64 percent.

A spokesman for Paulson declined to comment.

Uncertainty Over Disclosures

“Due to the uncertainty over Sino-Forest’s public
disclosures and financial statements, we have sold our stock and
await the results of the independent committee’s
investigation,” Paulson said in an e-mailed statement.

Paulson owned Sino-Forest shares since at least March 2008,
when the firm reported holding a 10 percent stake in the
company, enough to trigger Canadian reporting requirements. By
June 2009, Paulson owned 40.7 million Sino-Forest shares, a 19
percent stake, according to filings with regulators.

Paulson disclosed the sale of his stake less than a week
after Sino-Forest Chief Financial Officer David Horsley said the
hedge-fund manager had been “very supportive, giving us
suggestions” on dealing with Block’s allegations. Sino-Forest
shares have lost C$3.8 billion in value since Block’s report.

Allen Chan, Sino-Forest’s chairman and chief executive
officer, has denied the allegations from Muddy Waters. He
established an independent committee to investigate and
appointed PricewaterhouseCoopers LLP to assist.

April Emspak, an external communications adviser to Sino-Forest, said company executives weren’t immediately available to
comment on Paulson’s sale.

Orient Paper

Orient Paper Inc., target of a critical Muddy Waters report
last year, urged overseas-listed Chinese companies to increase
transparency to combat short sellers. Orient Paper’s shares are
languishing 60 percent below their price before Block’s
allegations, even after a four-month probe by Loeb & Loeb LLP,
Deloitte & Touche Financial Advisory Services and TransAsia
Lawyers found no evidence to support the claims.

Chinese companies “should conduct the third-party
independent investigation like we did, they should do it even
better than us in order to shut others’ mouths,” Liu Zhenyong,
chairman and CEO of Baoding, Hebei-based Orient Paper, said
yesterday in a telephone interview.

Paulson Fund Rebound

Paulson rebounded from similar losses last year, when the
Advantage Plus fund gained as much as 18 percent, depending on
the share class, after falling 11 percent in the first eight
months.

“Over the past five years Paulson has been considered the
top hedge-fund manager in the industry,” said Don Steinbrugge,
managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors. “This
mistake in his portfolio will show he is not infallible, but he
will still maintain the reputation of being one of the top
players.”

Paulson has been betting on an economic recovery by 2012,
which is why he’s been bullish on U.S. banking stocks. Citigroup
Inc., Paulson’s third-largest stockholding according to a
regulatory filing, has dropped 19 percent this year, and Bank of
America Corp., the firm’s fifth-largest stake, is down 21
percent.

Paulson told investors in a letter in late 2009 that Bank
of America may almost double over the next two years. The stock
has lost about a third of its value since then.